Liquidity Needs and Vulnerability to Financial Underdevelopment
The author provides evidence of a causal and economically important effect of financial development on volatility. In contrast to the existing literature, the identification strategy is based on the differences in sensitivities to financial conditi...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2003/11/2820051/liquidity-needs-vulnerability-financial-udnerdevelopment http://hdl.handle.net/10986/17899 |
| Summary: | The author provides evidence of a causal
and economically important effect of financial development
on volatility. In contrast to the existing literature, the
identification strategy is based on the differences in
sensitivities to financial conditions across industries. The
results show that sectors with larger liquidity needs are
more volatile and experience deeper crises in financially
underdeveloped countries. At the macroeconomic level, the
results suggest that changes in financial development can
generate important differences in aggregate volatility. The
author also finds that financially underdeveloped countries
partially protect themselves from volatility by
concentrating less output in sectors with large liquidity
needs. Nevertheless, this insulation mechanism seems to be
insufficient to reverse the effects of financial
underdevelopment on within-sector volatility. Finally, the
author provides new evidence that: 1) Financial development
affects volatility mainly through the intensive margin
(output per firm). 2) Both the quality of information
generated by firms, and the development of financial
intermediaries have independent effects on sectoral
volatility. 3) The development of financial intermediaries
is more important than the development of equity markets for
the reduction of volatility. |
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